The U.S. jobless claims number out on Friday was horrific: a loss of 533,000 jobs in November: the biggest monthly decline since 1974. The economy seems to be in free fall as economic data point, after economic data point seems to suggest that the light switch has been turned off on the U.S. economy. There seems to be little doubt that this economic slowdown will be the longest recession in the post Second World War period.

Since December 2007, when the U.S. first started sliding into recession, the American economy has shed 1.9 million jobs. But what is most alarming is that two-thirds of these layoffs have occurred in the past three months. It is only going to get worse, as new vehicle sales are plummeting, raising the very real possibility of more layoffs to come.

What is clear is that when the dust finally settles on the American economy, evidence of government handiwork will be everywhere. Just last week, the executives of GM, Chrysler and Ford were back on Capitol Hill looking for a bailout. GM wants $12 billion and warns, “Absent such assistance, the company will default in the near term, very likely precipitating a total collapse of the domestic industry,” contending that its collapse would create “a ripple effect that will have severe, long-term consequences to the U.S. economy.”

Can it get more pathetic? You betcha. Economists such as Merrill Lynch's David Rosenberg, sees things deteriorating from here. Unemployment could spike up to 9%, a level above the 6.3% range during the tech wreck and 7.8% high that occurred during the 1992 recession. Even Ex-Federal Reserve Chairman Alan Greenspan is on record as saying that the fourth quarter GDP numbers will be awful. Rosenberg is predicting that the U.S. economy will contract by 5% in the fourth quarter of 2008 and by 3% to 4% during the first half of 2009. If that occurs, it will be the first time in half a century that the U.S. economy has contracted three quarters in a row.

A bankruptcy of Detroit's big three automakers could result in another 2.9 million Americans joining the ranks of the unemployed as autoworkers, dealers and parts makers close down in response.

But while manufacturing layoffs have been garnering all the headlines lately, service sector jobs could be the ones on the firing line. To remain competitive American manufacturing has been outsourced to low-wage countries such as China . That leaves service sector employees in the crosshairs of this financial tsunami.

Governments around the world have been working overtime, trying to stave off mass layoffs with bailout packages. The big worry among governments is deflation, or falling prices taking hold of Western economies, in a situation reminiscent of Japan in 1991. With falling prices, consumers postpone purchases indefinitely in the belief that tomorrow they will be able to buy what they want cheaper. In a country like the U.S. where the consumer is 73% of the economy, a time-out by consumers is just not in the government playbook.

But with too little savings and their stock and real estate holdings in tatters, American consumers may well be taking an extended break from the mall. And that could prolong this recession, making it feel unlike anything the current generation of homeowners and workers has ever known.

A year ago, governments would have been soundly criticized for the actions they are taking to bail out their national champions. But these are desperate times and the panic that sets in when a once-in-a-century financial crisis washes up on their shores, politicians of every stripe throw caution to the wind.

For investors, there is only one position worth considering, cash. While you should continue to hold your best-of-breed companies, particularly if they pay a healthy dividend, we are in unchartered waters. The stock market will start to turn higher and stay higher, when real estate prices stop falling and the BKX bank index, posts eight consecutive weeks of steadily higher closes. Until then, investors should pay down debt and remember that in this craziness, everything looks cheap. Their will be lots of bargains to be had, but for now, it is better to be safe, rather than sorry.

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